This is Part 1 of a 3-part series on how to control AND profit from commercial investment property with a Master Lease Option
Part 1 – [You Are Here] – Case Study: How an Accountant From Tennessee Acquired 63 Multifamily Investment Properties in 5 Years
Part 2 – How to Find Motivated Sellers and Get Them to Agree to Master Lease Options
Here's a question for you…
What if you could pocket $50 per month per door on commercial investment properties you don’t even own?
Yes, I said on ones that you don’t even own!
Not only is it possible, but I’ve been using and teaching this creative investing strategy since 2008.
Let’s face it.
To most, the thought of investing in commercial properties like apartment buildings, office buildings, self-storage and mobile home parks is… daunting.
To say the least.
I personally like investing in commercial – specifically multifamily – because of vacancies and cash flow.
If I own (or control) a single-family property and the tenant moves out, I have 100% vacancy and 0% of the cash flow coming in.
If I own (or control) a 10-unit apartment building and a tenant moves out, I have only 10% vacancy and 90% of the cash flow still coming in.
This was the whole reason I made the move to multifamily (commercial) from single-family (residential) back in the day.
TIP: Most newbie investors I work with are under the mistaken impression that you have to start out as a residential investor and work your way up to commercial.
Using my Master Lease Option Method, it is not only possible but so simple to “invest” in commercial property with no cash, credit, risk or previous experience.
Now, I’m going to introduce you to a friend of mine in just a sec who started out as a residential lease option investor, came to me to learn master lease option investing and after 5 years has acquired 63 apartment buildings using this method.
But first, I want to explain more about the strategy itself.
Making money with the Master Lease Option Method is simple, in fact here’s step-by-step exactly how it works…
The Master Lease Option Process
1) First, you get a master lease and option agreement in place.
This means you become the “master tenant” of the property and are in charge of the operation and you have the right (but not the obligation) to purchase the property at a pre-agreed price at some point in the future.
2) Next, you raise rent or bill back utilities to the tenants…
3) Then, YOU collect the spread and pocket the increase in equity when you exercise your option…
Master Lease Options give you the FREEDOM to control a property (without owning it), get a property manger to run everything, increase the value of a property…
…and pocket the difference as 100% profit.
How Come I've Never Heard of a Master Lease Option?
Master lease options are not a new thing.
Or some obscure shenanigan that no one has ever heard of that doesn’t work in the real world.
In fact, one of the most famous buildings in the world has a master lease option.
Recognize this building?
It’s the EMPIRE STATE BUILDING in New York City, baby!
And this building has a master lease option in place.
Not only, has it got a master lease option in place, it’s been in place for more than 100 years!
The Empire State Building Master Lease
The original owner of the Empire State Building, Col. Henry Crown, originally agreed to sell the land to the Prudential Insurance Company and lease back the building.
When Empire State Building Associates came into the picture in 1961, it negotiated a new lease with Prudential running 114 years on both land and building.
It paid Prudential a return of about 5 percent on an investment of $46 million. The lease provided renewal options after 30 years and four 21-year periods thereafter.
The Lease and Sublease
The annual rent payable by to the building owner under the Lease is $1,970,000 from January 5, 1992 through January 5, 2013 and $1,723,750 annually during the term of each renewal period thereafter.
The annual gross rent is $6,018,750 from January 1, 1992 through January 4, 2013, and $5,895,625 from January 5, 2013 through the expiration of all renewal terms.
So, the spread in this case which is the difference between what has been agreed to be paid to the owner and what the master lessee collects is more than $4,000,000.
No wonder Donald Trump has been trying to get control of the master lease for years. (He's moved on to a new project as of late.) 🙂
By the way, the Empire State Building appraised for $2.5 billion in 2012.
The point is that Master Lease Options are real.
And they have been around a long time.
And they aren’t going anywhere anytime soon.
And they are profitable.
And they are perfectly legal.
And they work on any commercial building that has tenants.
Even the Empire State Building.
Chances are you’re not going to cut your teeth on master lease options on one of the most famous buildings in the world valued at $2.5 billion dollars.
So, let's get down to brass tacks. (Brass tacks? What does that even mean?)
Show Me the Money
Let’s run some hypothetical numbers on a 15-unit apartment building.
Current Annual Income: $100,000
Current Annual Expenses: $45,000
Current Net Operating Income: $55,000
You come in and increase the income by 20% (using methods I’ll tell you about later in this blog series) and…
New Annual Income: $120,000
New Annual Expenses: $45,000
New Net Operating Income: $75,000
That’s a difference (or spread) of $20,000 a year.
And that goes IN YOUR POCKET as the “master tenant.”
That's Cash. What About Equity?
The cool thing about commercial properties (unlike residential) is that their VALUE is tied directly to their INCOME.
So any increase in income has an exponential increase in value.
Let’s say the market capitalization (CAP rate) is 8%.
We can easily determine the value of the property using this simple formula:
Property Value = Net Operating Income/ Capitalization Rate
So, before you worked your magic, the value was…
$55,000/8% = $687,500
And let’s say that’s what your option to purchase price is.
But after you worked your magic, the value has increased…
$75,000/8% = $937,500
What the what?!
You have just increased the EQUITY on the property by $250,000!
So, one relatively small apartment deal – say 15 units – has NETTED you $20,000 a year profit and $250,000 in equity.
Well, what if you did that 63 times in 5 years?
Meet Bill Walston
Yes, he’s a real person.
I met Bill back in 2010 when he bought my Master Lease Option Method program and he emailed in a few questions.
I heard through the grapevine that he was having success with the method, so I reached out to him to chat.
He says that I literally said, “Who are you and what are you doing?”
I feel like I was probably a little nicer than that. But, you never know. ?
Bill and I got to know each other well and now we’re good friends and he’s a coach in my Investor Insights Accelerate program working with our private coaching clients.
Bill was a CPA who was doing residential lease options but he wanted to transition to commercial investing for the same reasons that I did.
When most people find out Bill has done as many master lease options as he has they have one of two reactions…
1) Disbelief. They just flat out think he’s lying.
2) Curiosity. They want to know HOW he’s done it!
And the big secret is that there is no secret.
It’s just following (and dialing in) the simple systems and process that makes this strategy work.
And making LOTS of offers because at the end of the day real estate is a numbers game.
Bill lives in a small town in northeastern Tennessee and has closed deals in multiple areas of the country from his home office (and Starbuck’s).
He controls properties as big as 20 units and as small as 4 units and his goal on every deal is to make a minimum of $50 per door per month in the “spread.”
So, on a 10-unit that’s a minimum target of $500 a month in income to him.
Bill has all his properties professionally managed by property management companies so that for the most part, it’s a hands free investment.
And as a result he works less than 25 hours a week on his portfolio.
So, that’s Bill.
I have other students who are crushing it with this method now too. Including Sharon Collins who has master lease options on two MARINAS!
So as long as there are tenants in place paying something each month, this strategy will work and is an EXCELLENT and risk-free way to begin investing in commercial properties.
In Part 2 of this series, I’ll share some tips on finding motivated sellers for this strategy.
Leave me a comment with any questions and let me know what you think!